Posts Categorized: Uncategorized

Welcome to the new and improved blog of the BBA’s Trusts & Estates Section. Here you will find educational and insightful posts, written by trusts & estates attorneys from the Boston area. Please feel free to check out our tabs and learn more about the T&E Section and the BBA as a whole.

Authors: Nina Dow, Esq., LL.M., and Brittany Wyman, J.D. Student at Florida Coastal School of Law

Two recent decisions from the Supreme Court, United States v. Windsor,570 U. S. ____ (2013), and Hollingsworth v. Perry, 570 U. S. ____ (2013) (slip opinion), have had a significant impact on the recognition of same-sex marriage nationwide.

The Supreme Court in Windsor held that the definition of marriage in Section 3 of the Defense of Marriage Act (DOMA), as a union between a man and a woman, is unconstitutional, because it violates the due process and equal protection provisions of the Fifth Amendment. As a result of this decision, the marriages of same-sex couples recognized under state law are now recognized under federal law.

The plaintiff in Windsor, Edith Windsor, was the surviving spouse of a same-sex couple whose marriage was recognized by the State of New York, but who was denied the federal estate tax marital deduction due to Section 3 of DOMA. Windsor brought suit for a refund of the federal estate taxes paid by her spouse’s estate, since federal recognition of their marriage and the application of the marital deduction would have resulted in no federal estate tax being due from the estate.

In affirming the decision of the U.S. Court of Appeals for the Second Circuit in favor of Windsor, the Supreme Court acknowledged the federalist principles favoring the invalidity of DOMA, but ultimately relied on the due process and equal protection provisions of the Fifth Amendment. In finding that DOMA impermissibly interfered with state protection of marital rights, the Supreme Court stated its rationale as follows: “DOMA singles out a class of persons deemed by a State entitled to recognition and protection to enhance their own liberty. . . . DOMA instructs all federal officials, and indeed all persons with whom same-sex couples interact, including their own children, that their marriage is less worthy than the marriages of others. The federal statute is invalid, for no legitimate purpose overcomes the purpose and effect to disparage and to injure those whom the State, by its marriage laws, sought to protect in personhood and dignity.”

Hollingsworth addressed an amendment to the California constitution, known as Proposition 8, which forbade same-sex marriage but was enacted after the California Supreme Court ruled that same-sex couples had a constitutional right to marry. Two same-sex couples who had been denied marriage licenses brought suit against the Governor of California, and the U.S. District Court for the Northern District of California held that Proposition 8 was unconstitutional, after finding that it violated the due process and equal protection provisions of the Fourteenth Amendment.

The Supreme Court in Hollingsworth dismissed the appeal of this decision on procedural grounds, rather than substantive grounds, by finding that the backers of Proposition 8 lacked standing to appeal the case when state officials chose not to appeal the decision. As a result, the Supreme Court lacked authority to decide the case on its merits. This means that the District Court’s order permitting same-sex marriage stands, and same-sex marriage will continue in California. However, because it was not decided on the merits, Hollingsworth will not have any precedential value outside of California.

United States v. Windsor: A New Direction in Planning for Same-Sex Couples

On June 26, 2013, the U.S. Supreme Court in United States v. Windsor1 overturned Section 3 of the Defense of Marriage Act (“DOMA”), which had defined marriage as a union between a man and a woman.2 As a result, married same-sex couples who live in a state that recognizes their marriage are now treated as married under federal law.3Windsor does not, however, require that all states permit or recognize same-sex marriage.4 Further, the language of the decision suggests it does not apply to couples who are parties to a civil union or domestic partnership, nor to couples who reside in a state that does not recognize same-sex marriage. In addition, because the Court found Section 3 unconstitutional as of its enactment in 1996, the effective date of the resulting legal changes remains uncertain. In spite of these unknowns, Windsor offers enough guidance to dramatically shift personal and tax planning strategies, both for same-sex couples and for third parties who wish to provide for them.

What Has Changed

Provisions of federal law applicable to married persons now apply equally to married same-sex couples living in a jurisdiction that recognizes their marriage. With respect to tax and estate planning issues, some of the most significant changes for these couples include the following:

1. Federal Income Taxes

Married taxpayers who are not separated must file their returns as “married” persons.5 Before Windsor, married same-sex couples were required to file federal income tax returns as either “single” persons or as “head of household.” Post-Windsor, the married couple must file income tax returns either as “married filing jointly” or “married filing separately.” For couples with a disparity in income, this may result in substantially lower taxes, but dual high-income couples will likely pay more tax. Couples for whom filing as “married” results in income tax savings may amend recent tax returns. An amended return that makes a claim for refund can be filed within three years of the date of filing the original return or two years from the date the tax was paid, whichever is later. Significantly, however, there is no obligation to file amended returns, and taxpayers should be aware that filing amended returns may subject the returns to further scrutiny regarding income and deductions reported.6

2. Estate and Gift Tax Planning

Couples who fall within the Windsor class of married couples now enjoy the favorable federal transfer tax benefits afforded all married couples for wealth transfer planning, but also are subject to the restrictions applicable to planning for related parties:

Marital Deduction Planning. The federal gift and estate tax unlimited marital deductions are now available to these couples. Previously, gift and estate tax would have been imposed on the transfer of assets between the spouses as though they were unrelated persons. Assets can be transferred between them, outright or in trust, effectively deferring transfer tax to the death of the survivor.7 This allows the couple to rearrange ownership of assets to minimize transfer taxes, obtain creditor protection and plan appropriately for the survivor’s liquidity needs.

Portability. Portability permits a surviving spouse to use the predeceasing spouse’s unused federal estate tax exclusion to make additional gifts tax-free or reduce the survivor’s estate taxes upon death.

Community Property Interests. Couples in community property states that recognize same-sex marriage will now receive a full step-up in basis for income tax purposes on community assets at the first spouse’s death.8

Disclaimers. A surviving spouse may disclaim certain property interests while retaining other interests in the same property, unlike other beneficiaries, who cannot retain any interest in disclaimed assets. Particularly with trust planning, disclaimers are a useful post-mortem planning tool.

Spousal Election. Prior to Windsor, a surviving spouse could take advantage of a state level right of election (a right to receive a share of the deceasing spouse’s property) in some states, but could not take advantage of the associated federal estate tax benefit from the marital deduction. After Windsor, the spousal election may provide appropriate planning for the surviving spouse without a potentially disastrous estate tax impact.

Insurance Planning. The availability of the marital deduction and portability may impact life insurance planning, as the burden of the estate tax can now be deferred until the surviving spouse’s death. Consequently, “second-to-die” policies may now be more appropriate than single life policies.

Lifetime Gifting. Windsor impacts couples who contemplate lifetime gifting. Married couples now may “split gifts” to third parties. Previously, if one spouse had significantly greater wealth, he or she was limited to the annual exclusion and unified credit, without the ability to use the spouse’s exclusions and credit.

Generation-Skipping Tax Planning. Post-Windsor, there are additional options to maximize the generation-skipping tax planning for the remainder beneficiaries by fully applying both spouses’ exemptions to the trust planning. This is especially valuable if one spouse has significantly more assets than the other.9 A reverse-QTIP election can be made with respect to a marital trust for the surviving spouse, and the surviving spouse can allocate GST exemption to the non-exempt marital trust.

Grantor Trust Planning. Irrevocable trusts that include the spouse as a beneficiary are treated as grantor trusts for income tax purposes, with the result that the donor continues to be legally responsible for the income recognized by the trust. The donor’s payment of taxes is a tax-free gift, as trust assets are not diminished by income taxes, nor are the beneficiaries burdened by the tax. After Windsor, there are additional opportunities for planning with grantor trusts for same-sex married couples. Conversely, those who have already created irrevocable trusts naming a spouse as trustee or as a beneficiary should confirm that grantor trust status is not inadvertently created because of Windsor.

Previous Planning with Techniques Not Available to Related Parties. Prior to Windsor, same-sex couples could take advantage of estate planning techniques not available to couples treated as married for federal tax purposes. Popular techniques to transfer wealth included residence trusts, common law GRITs, loans without adequate interest and shareholder agreements that did not comport with the requirements of §2703. These techniques should no longer be used for couples who fall within the Windsor decision. For domestic partners and married persons living in a state that does not recognize their union, these techniques should not be used until further guidance is received from IRS.

Amendments to Prenuptial and Postnuptial Agreements. Many agreements governing the relationships of same-sex couples incorporate provisions to address the prior unavailability of certain income tax benefits in unwinding their legal relationships. Some agreements may require amendment if the change in tax laws results in unintended consequences.

Alimony and Property Settlement on Divorce. Federal recognition of a couple’s marital status provides clarification of the treatment of certain payments:

alimony may now be deductible to the payor spouse and taxed as income to the payee spouse, or may be treated as a non-income producing event at the election of the parties;

lump sum property settlements may now be made without recognition of gain, so long as they meet the other requirements of the Code; and

Windsor’s narrow application leaves several practical questions for same-sex couples, regardless of whether they live or own property in a jurisdiction that recognizes their marriage, civil union or domestic partnership. The IRS promised additional guidance in the following message on June 27, 2013:

“We are reviewing the important June 26 Supreme Court decision on the Defense of Marriage Act. We will be working with the Department of Treasury and Department of Justice, and we will move swiftly to provide revised guidance in the near future.”

Until then, Windsor’s application beyond its narrow holding is uncertain. On its face, the Windsor decision turns on state law recognition of marriage, and is limited to marriage. According to the decision, the definition of “marriage” between a man and a woman was always unconstitutional. These points raise numerous questions, including:

Whether a married couple would no longer be treated as married upon moving to a jurisdiction that does not recognize same-sex marriage, resulting in a “musical chairs” approach to taxation.

Whether a couple that has entered a civil union or domestic partnership is deemed “married” under federal law, particularly if the state statute provides that those parties are afforded the same legal benefits as spouses. There are indications the IRS may take an expansive view for the sake of uniformity. In private guidance, the IRS indicated pre-Windsor that parties to an Illinois civil union, for example, are “not precluded from filing [income tax returns] jointly.”10 Similarly, the IRS has ruled that California registered domestic partners should each report their income as would a married couple living in that state.11

Whether third parties who make gifts to spouses of their descendants might be making generation-skipping tax transfers, depending on whether the spouse is recognized as a spouse or not. It is not clear whether the law of the state of the donor (i.e., the creator of the trust), the donee or the trust would apply for this determination. Furthermore, it is not clear whether the determination would be made at the time the interest is created or at the time of a trust distribution.

Whether those who would have been entitled to federal benefits in the absence of DOMA may claim them retroactively and, if so, what that process will be.

What to Do Next

Although many questions remain, Windsor does provide an initial framework to guide same-sex couples and their families in the planning process:

Those couples to whom the case clearly applies should file their income tax returns as married taxpayers and, if appropriate, may amend prior returns. Other same-sex couples may file separately and file a concurrent protective claim for refund, notifying the IRS that they may claim a refund pending changes in tax law or other legislation. The same is true for gift and estate tax returns where the interest transferred would qualify for the marital deduction.

All same-sex couples should revisit estate planning documents for marital deduction planning to the extent appropriate, and in particular, to review clauses governing the source for payment of tax.

Windsor does not automatically recognize all same sex partners as spouses. Families who wish to provide this recognition in their estate plan must incorporate explicit language into their relevant instruments. While this will not change the tax impact of the plan, it will ensure that those who are intended to be beneficiaries will receive their share of the estate.

Consider the need for amendment of prenuptial or postnuptial agreements. Even if tax considerations suggest the benefit of amending prenuptial agreements or creating a postnuptial agreement, the couple may be unwilling to reopen such discussions limited to tax issues. In addition, the requirements for such agreements are heavily dependent on state law.

Windsor is widely regarded as a landmark case. Its practical application will become clearer over time. In addition to the changes discussed above, the decision affects retirement benefits, social security benefits, immigration status, veterans’ or military spousal benefits, and multiple other federal laws and programs.

To learn more about planning opportunities for same-sex couples after the Windsor decision, consider attending the Boston Bar Association’s upcoming CLE “Examining Post-DOMA Tax Implications” on Tuesday, September 10, 2013 from 3:00 PM to 6:00 PM. For more information or to register, click here.

5 The determination of whether an individual is married is made at the close of the taxable year.

6 Although taxpayers have a legal duty within any applicable statute of limitations to pay the correct tax, neither the Internal Revenue Code nor the Treasury Regulations require taxpayers to unilaterally correct tax return submission errors or omissions. Instead, the regulations provide that, upon discovering an error or omission involving an understatement of income or an overstatement of deductions, a taxpayer “should” file an amended tax return and pay any tax due. As of this date, it is not clear that the IRS will in fact issue refunds.

7 This is only true if the donee-spouse is a U.S. citizen. The law restricts marital deduction transfers to all non-citizen spouses.

8 In addition, same-sex married couples who live in community property states that recognize same-sex marriage (California and Washington) must split income earned evenly between the spouses, unless the couple has opted out of community property treatment or has a prenuptial agreement. While DOMA was in effect, this rule also applied to Nevada, which recognizes civil unions. See also footnote 11.

9 For couples where there is a disparity in age that exceeds 37 1/2 years, there will no longer be exposure to the GST tax for gifts during life or at death to the other spouse, as they will be treated as being of the same generation. In addition, no adverse GST impact will apply to gifts to a son-in-law or daughter-in-law who is more than 37 1/2 years younger than the donor.

Thank you to everyone who has already participated in the MUPC Survey.

If you have not yet responded, please do so before the end of today, Friday, October 26th by clicking here. Responses will be analyzed and shared with the bar and the Probate and Family Court. Please take this opportunity to share your experiences and suggestions regarding the MUPC and the new procedures. Your feedback is important.

The Trusts & Estates Section, in collaboration with the Massachusetts Bar Association, would like to understand how implementation of the new MUPC procedures has progressed in the various Massachusetts counties. Please take a few minutes to complete a brief, 7-question survey, found here, and share your perspective and experiences with respect to speed of appointments, time to process filings, using the new MUPC forms, and any other feedback you might have about the new procedures.

On Thursday, June 28, 2012, both the House and the Senate passed House Bill No. 4223, available here. H.4223, which amends S.2128, currently awaits Governor Patrick’s signature, and will take effect immediately.H.4223 will enact the Massachusetts Uniform Trust Code (the “MUTC”).The MUTC (new Chapter 203E of the Massachusetts General Laws) will generally replace, and greatly expand upon, the trust law provisions (Article VII) of the Massachusetts Uniform Probate Code (the “MUPC”), which became effective on March 31, 2012.H.4223 will also make various (primarily technical) changes to the MUPC, and will introduce a revised Probate and Family Court Fee Schedule.We will provide more detail as soon as H.4223 has become effective.———————–

The Boston Bar Association Trusts & Estates Section Blog provides information as a service to its users and BBA members. Neither the Trusts & Estates Section nor the Boston Bar Association are a law firm and do not represent clients in any way. Although the information on this site is about legal issues and informational services it is not legal advice. Use of this blog does not in any way create a lawyer-client relationship. If you need a lawyer, the Boston Bar Association Lawyer Referral Service can refer you to a qualified attorney. http://www.bostonbarlawyer.org/ or call 617-742-0625.

When a client has misgivings about paying rent after his QPRT term expires, or is unable to afford it, there are limited options. One of them is a relatively new, IRS-sanctioned technique known as a “Reverse QPRT,” which can avoid the potential income, gift, and estate tax consequences of alternatives such as using a promissory note or simply foregoing rent payments.In a Reverse QPRT, the Settlor creates an irrevocable trust and transfers to it his interest in a residence, just as in a standard QPRT. Rather than retaining a right to live in the residence for X years and making a gift of the remainder, however, in a Reverse QPRT the Settlor makes a gift of the term interest and keeps the remainder interest.

Imagine a client, Don, who at age 65 created a QPRT. Don is a widower with one child, Ben. Through his QPRT, Don retained the right to live in his home rent free for 10 years, after which it would be distributed outright to Ben. At the end of the 10 years, the Trustee conveyed the residence to Ben, and Don began paying fair market rent. It is now some months later, and Don, having reassessed his financial situation, determines it would be best to postpone making rent payments for some time.

One way to accomplish this would be for Ben to create a Reverse QPRT. Specifically, Ben, now the owner of the residence, can create an irrevocable trust, transfer the home to it, and direct the trustee to allow Don to live in the home rent free for 5 years. At the end of that time, the trust could be liquidated and the property conveyed back to Ben.

Normally, such a transfer in trust to a family member with a retained interest would be subject to the Code’s special valuation rules, I.R.C. §§ 2702(a)(1) and (2). Under these rules, Ben’s remainder interest, which he would like to deduct for gift tax purposes from the value of his gift of the residence to the trust, would be deemed to have a value of zero.

These special valuation rules do not apply to QPRTs, of course, which are exempt under I.R.C. § 2702(a)(3)(A)(ii) and regulations at § 25.2702-5(c). Since 2008, the IRS has recognized in over a dozen Private Letter Rulings that Reverse QPRTs are likewise exempt from the special valuation rules. [1]

Accordingly, the value of Ben’s remainder interest can be determined using the I.R.C. § 7520 rate, which for June 2012 is 1.2%. This historically low rate depresses valuations for income interests and increases valuations for remainder interests, compared with higher rates. So from a gift tax standpoint, it discourages the use of QPRTs, but produces quite favorable results for Reverse QPRTs. Unless Ben has made substantial lifetime gifts, he can create a Reverse QPRT and give his father a term interest in the residence, while paying no gift tax and using a relatively small fraction of his $5.12 million gift tax exemption.

The Private Letter Rulings

1. Outright Distribution at End of Original QPRT Term

In the first Private Letter Rulings in which the IRS considered Reverse QPRTs, issued in 2008, the facts were the same as those in our Don and Ben example. [2]

In these PLRS, the Settlor of the first QPRT had survived the term, the residence had been distributed outright to his children, and the Settlor had begun paying rent. The children proposed to create a new irrevocable trust, the terms of which granted their father a right to live in the residence for one year, after which the trust would terminate and the residence would be distributed back to them. The children were to be the Trustees of the Reverse QPRT. They also retained reversionary rights; if any child died before the term ended, his interest in the residence would be distributed to his estate.[3]

The taxpayers requested a ruling that this proposed trust would qualify as a personal residence trust under the QPRT regulations. The IRS noted that, pursuant to Rev. Proc. 2007-3, it ordinarily will not issue rulings regarding whether a particular trust qualifies as a QPRT. The IRS found it appropriate to issue rulings in these cases, however, “because of the unusual facts presented.” It ruled that, assuming the residence was a personal residence, as defined in the regulations, the trust did qualify as a QPRT, and the children’s transfer to the trust would be exempt from the special valuation rules.

Prior to these rulings, some practitioners may have assumed that the QPRT Donor must hold the term interest in the trust. The regulations, however, require that the property held by a QPRT must be limited (with a few exceptions) to “one residence to be used… as a personal residence of the term holder.” [4] A personal residence may be either the term holder’s principal residence or other residence. [5] Thus, a Reverse QPRT meets these requirements; the regulations do not require that “term holder” be synonymous with “Donor.”

2. Continuing Trust for Beneficiaries After Expiration of Original QPRT Term

In the earliest PLRs described above, the original QPRT provided for an outright distribution to the Donor’s children when the Donor’s term expired. Subsequent PLRs considered situations in which the original QPRTs provided that the residence would remain in trust for the children’s benefit, postponing outright distribution typically until the death of the original Donor or until the second death of the Donor and his spouse.

In those rulings, the Donor (individually and as Trustee) and children jointly executed trust modifications to allow the children to create a Reverse QPRT. In some cases, this modification was executed before the expiration of the original QPRT term; in others, it was executed after the term expired. The modifications generally provided that at the end of the term, the children could direct the trustee to liquidate the trust or to make a gift of a term interest to whomever they chose. In all but the most recent PLRs, it was proposed that the children would convey their interest in the residence, by warranty deed, to a new Reverse QPRT, which provided a term interest to their parent.

Beginning with the PLRs issued in 2010, the trust modifications proposed by the taxpayers took a different tack. The modifications provided that: (i) the children were granted a power to appoint the trust property to themselves upon expiration of their parent’s term interest, and (ii) could, instead of appointing the property, direct the trustee to amend and restate the original QPRT to grant their parent the right to occupy the residence for a stated term. Under this fact pattern, the children’s release of their general power of appointment constituted the gift to their parent, and there was no need to re-title the property in another trust.

In all of the above rulings, the IRS agreed that I.R.C. § 2702 was inapplicable to the proposed transfer to a Reverse QPRT, or to the proposed trust modifications, or amendments and restatements, described in each ruling.

3. The Caveat: Potential Inclusion Under I.R.C. § 2036

In every ruling in which the IRS blessed a Reverse QPRT, it also explicitly stated that, “no opinion is expressed or implied concerning whether…” the proposed technique would result in the residence being included in the parent’s gross estate under I.R.C. § 2036.

Although the IRS has not yet ruled on the issue of whether, and under what circumstances, a Reverse QPRT will cause the residence to be included in the gross estate of the original Donor, it also did not conclude in any of the PLRs that such inclusion is required under I.R.C. § 2036. This implies that any such inclusion will depend on the facts of each situation, with existing cases and rulings serving as guideposts.

Certainly, in most cases if the beneficiary of a Reverse QPRT survives beyond the term, I.R.C. § 2036 inclusion should become a non-issue, just as with a “standard” QPRT.

Beyond that, that the risk of estate inclusion can be minimized by steering clear of circumstances suggestive that the original QPRT Donor never intended to relinquish possession and enjoyment of the residence during his lifetime, or that the Donor and beneficiaries agreed at the outset that the QPRT would be followed by a Reverse QPRT. In other words, the facts should support a conclusion that there was a bona fide transfer of the remainder interest to the children after the QPRT term ended, and that their gift of a term interest to their parent was not pre-arranged. In order to accomplish this, the parties could:

· Allow the QPRT term to expire prior to executing any trust modification that relates to granting another term interest to the original QPRT Donor

· Ensure that the original Donor pays fair market rent for some period after the QPRT term ends· If the original QPRT provided for distribution outright to beneficiaries after the term expires, ensure that a deed conveying the residence to the beneficiaries is executed and recorded

· Document any changed financial circumstances or other hardship that would provide a basis for a Reverse QTIP

· Avoid having Settlor of the original QPRT serve as Trustee of the Reverse QPRT

· Give the Settlor of the Reverse QPRT powers or interests that could extinguish the parent’s term interest. For example, have the Settlor retain a reversion in the event that he dies during the parent’s term interest

If clients are interested in a Reverse QPRT, keeping the residence out of the parent’s estate most likely remains a planning goal. [6] That goal will need to be balanced against the ability to pay rent and the risk of possible inclusion under § 2036. Once the original Donor has survived the QPRT term, and achieved the intended “estate freeze,” the prospect of potentially undoing that may cause some to choose to pay rent after all. But if paying rent is not a viable option, a Reverse QPRT may be able to effectively extend the original Donor’s term interest, while still sheltering the residence from inclusion in his gross estate. Even if the transaction cannot be structured to eliminate potential arguments for § 2036 inclusion, the consequences of such inclusion should be no more onerous than if the Donor had died during the first QPRT term. [7]

Looking Forward: Drafting Considerations

Practitioners may also want to keep Reverse QPRT techniques in mind when drafting QPRTs, in order to facilitate their potential use down the road with minimal § 2036 exposure. For example, perhaps in some situations the balance will tip in favor of outright distribution after the QPRT term ends, rather than leaving the residence in a continuing trust that would require amendments with the Donor’s involvement. The Private Letter Rulings also raise the question of whether, and to what extent, trust provisions similar to the modifications described in the rulings might be built into a QPRT at the outset, to provide flexibility while preserving the QPRT’s gift and estate tax advantages.

[2] Except that two siblings were the reminder beneficiaries of the first QPRT and together created the new Reverse QPRT. See PLR 200814011, PLR 200816025.

[3] This reversionary interest was described in the fact patterns of only the first two rulings: PLR 200814011 and PLR 200816025.

[4] 26 C.F.R. 25.2702-5(c)(5) (emphasis added).

[5] See 26 C.F.R. 25.2702-5(c)(2)(i) (emphasis added).

[6] Otherwise, the QPRT Donor can simply continue to live in the residence rent free after the QPRT term ends; there is no need for a Reverse QPRT.

[7] All a Settlor loses if he doesn’t survive the QPRT term is the benefit of the intended “estate freeze,” he will not have wasted any gift tax payment or unified credit. See Natalie Choate, The QPRT Manual §§ 1.3.09, 4.1.04 (2004); I.R.C. § 2001(b). It is not clear, however, whether the children might be worse off if the residence held in a Reverse QPRT is included in their parent’s gross estate by reason of I.R.C. § 2036. To the extent the children pay gift tax or use up their exemption, this would not be accounted for in the parent’s estate tax calculations.

——————————————————

The Boston Bar Association Trusts & Estates Section Blog provides information as a service to its users and BBA members. Neither the Trusts & Estates Section nor the Boston Bar Association are a law firm and do not represent clients in any way. Although the information on this site is about legal issues and informational services it is not legal advice. Use of this blog does not in any way create a lawyer-client relationship. If you need a lawyer, the Boston Bar Association Lawyer Referral Service can refer you to a qualified attorney. http://www.bostonbarlawyer.org/ or call 617-742-0625.

Although Massachusetts estate planners and family law practitioners are familiar with M.G.L. c. 190B, the Massachusetts Uniform Probate Code (“MUPC”), as a result of the statute’s guardianship provisions having taken effect on July 1, 2009, real estate conveyancers are just beginning to appreciate the MUPC’s impact on real estate practice resulting from the reforms that took effect on March 31, 2012.

Prior to March 31, 2012, the language (and practice norms) regarding sale of real estate from a decedent’s estate seemed clearer: real estate that was a probate asset could only be conveyed once the “estate ha[d] been officially administered and the creditors’ claims [were] either satisfied or barred.” [1] Real estate conveyancers knew that the fiduciary of an intestate decedent was an “administrator” who had no authority to convey real estate without a license to sell pursuant to M.G.L. c. 202, and that the fiduciary of a testate decedent was an “executor” who had authority to sell real estate (upon allowance of the Will) provided that power of sale was contained within a Will.

The MUPC’s introduction of informal and formal probate proceedings [2] initially caused disagreement among real estate practitioners as to what would be needed to “officially administer” an estate, and confusion as to whether probate petitions filed prior to March 31, 2012 would have to be refiled in order to comply with the MUPC. Because a formal proceeding (M.G.L. c. 190B, §3-401) may be commenced (and may supersede) an informal proceeding (M.G.L. c. 190B, §3-302) at any time up to three years from the filing of a petition for informal probate, real estate practitioners and title insurers disagreed as to whether and when real estate that is a probate asset could be conveyed, and when a license to sell real estate might be required.

In addition, the replacement of “administrator” and “executor” with the neutral term “personal representative” (M.G.L. c. 190B, §1-201) caused confusion because “personal representative” applies to the fiduciary of both testate and intestate decedents’ estates, making it impossible to know by reference to the term alone if a decedent died testate or intestate, and/or if the probate was commenced in an informal or formal proceeding.

Fortunately, however, the Probate and Family Court provided a comprehensive procedural guide to orient practitioners to the filing requirements under the MUPC. Also available are transitional Standing Orders and forms applicable to matters begun prior to the effective date of the MUPC which remained pending as of March 31, 2012.

Real estate practices for conveyance of real estate from a decedent’s estate under the MUPC have emerged from the Real Estate Bar Association in the form of new REBA Title Standard No. 78, in conjunction with Title Standards No. 10, 14, 36, 41, 43, 50 and 71 as revised May 7, 2012.

The new and revised Title Standards clarify that a personal representative has authority to convey real estate that is a probate asset under the following conditions:

1. Only with license to sell real estate pursuant to M.G.L. c. 202 if decedent died intestate (regardless of whether the proceeding is formal or informal).

2. Only with license to sell real estate pursuant to M.G.L. c. 202 if decedent died testate decedent (regardless of whether the proceeding is formal or informal) if there is no power of sale in the Will.

3. Without license if decedent died testate and petition for probate is made in a formal proceeding and there is power of sale in the Will.

A trap for the unwary is that the revision of the rules of intestate succession (M.G.L. c. 190B, §3-302) now ties decent and distribution of interest in a decedent’s estate to the date of the decedent’s death. In other words, the estate of an intestate decedent whose date of death is prior to March 31, 2012 is controlled by the long-established rules of descent and distribution set forth in M.G.L. c. 190, §3, where the calculation of intestate shares flows per stirpes. By contrast, the estate of an intestate decedent who passed away on or after March 31, 2012 is controlled by the rules of descent and distribution set forth in M.G.L. c. 190B, §201 et. seq., which introduces the more modern calculation of intestate shares per capita at each generation. For a concise discussion of the new regime for intestate succession, Jennifer A. Maggiocomo’s “Introduction to the Massachusetts Uniform Probate Code” is essential reading.

With regard to the MUPC’s new recording requirements for deeds of distribution (M.G.L. c. 190B, §3-908), letters of conservator (M.G.L. c. 190B, §5-420), and disclaimers of property interest (M.G.L. c. 190B, §2-801) probate attorneys will play an important role in guiding real estate attorneys as the need arises until new real estate conveyancing practice norms take hold.

Although real estate attorneys are quickly integrating many of the new provisions of the MUPC, M.G.L. c. 190B, §3-108, which creates a presumption of intestacy if a decedent’s Will is not submitted to probate within three years of the date of death continues to generate discussion. Prior to the MUPC, a Will could be submitted to probate within 50 years of the decedent’s death, and thereafter for cause, and clearing title to real estate that had been held in a family for several generations sometimes required filing Wills for commencing title curative probate actions years or even decades after a decedent’s passing. The concern among real estate attorneys is that the MUPC in its current form introduces uncertainty into heretofor accepted conveyancing practice.

It is hoped that technical corrections [3] to M.G.L. c. 190B filed January 24, 2011 by Sen. Cynthia S. Creem as S. 00704 will soon be enacted to clarify certain provisions of the current MUPC. Senator Creem’s Bill revises the existing M.G.L. c. 190B, §3-108 (4) and introduces an additional subsection (5), which reads as follows:

(4) an informal appointment or a formal testacy or appointment proceeding may be commenced thereafter if no proceedings concerning the succession or estate administration has occurred within the 3 year period after the decedent’s death, but the personal representative has no right to possess estate assets as provided in Section 3-709 beyond that necessary to confirm title thereto in the successors to the estate and claims other than expenses of administration may not be presented against the estate; and (5) a formal testacy proceeding may be commenced at any time after 3 years from the decedent’s death for the purpose of establishing an instrument to direct or control the ownership of property passing or distributable after the decedent’s death from one other than the decedent when the property is to be appointed by the terms of the decedent’s will or is to pass or be distributed as a part of the decedent’s estate or its transfer is otherwise to be controlled by the terms of the decedent’s will. These limitations shall not apply to proceedings to construe probated wills or determine heirs of an intestate. In cases under (1) or (2) above, the date on which a testacy or appointment proceeding is properly commenced shall be deemed to be the date of the decedent’s death for purposes of other limitations provisions of this chapter which relate to the date of death.

Enactment of this technical correction will permit informal or formal appointment of a personal representative, and the formal filing of a will (if any), so as to transfer real estate includable in an intestate or testate decedent’s probate estate to the decedent’s heirs or devisees even if more than three years have passed from the decedent’s date of death.

The Boston Bar Association Trusts & Estates Section Blog provides information as a service to its users and BBA members. Neither the Trusts & Estates Section nor the Boston Bar Association are a law firm and do not represent clients in any way. Although the information on this site is about legal issues and informational services it is not legal advice. Use of this blog does not in any way create a lawyer-client relationship. If you need a lawyer, the Boston Bar Association Lawyer Referral Service can refer you to a qualified attorney. http://www.bostonbarlawyer.org/ or call 617-742-0625

The T&E Litigation Update is a recurring column summarizing recent trusts and estates case law. If you have question about this update or about T&E litigation generally, please feel free to e-mail the author by clicking on his name above.

Farrell v. McDonnell

In Farrell v. McDonnell, Case No. 11-P-589 (May 11, 2012), the Appeals Court reversed a decree of the probate court disallowing a will on the ground that it was improperly executed.

The co-executors and the testatrix went to a bank for the execution of the testatrix’s will. One of the co-executors handed the will to a notary at the bank and then stood off to the side. At trial, the notary could not recall the circumstances surrounding the execution, but she identified her signature and notary seal on the will and testified as to her regular practice, which was to verify a testatrix’s identity, have her read the attestation and notarization clause aloud, and have her sign the will, after which the notary would sign in the notary block. Then, the notary would call two witnesses, one at a time, to witness the will in the testatrix’s presence.

Like the notary, neither of the witnesses could recall the execution, but they testified as to their regular practices and identified their signatures on the will.

Based on the testimony, the probate court found that the testatrix signed her will in the presence of the notary, and thereafter that the witnesses affixed their signatures to the will in the testatrix’s presence but without having seen her sign the will and without having spoken with her. Under these facts, the probate court ruled that the execution was improper because the testatrix had neither expressly nor implicitly acknowledged her signature on the will to the witnesses.

The question on appeal was whether, on these facts, an inference can properly be drawn that the testatrix acknowledged her signature to the witnesses. The Appeals Court answered this “close question” in the affirmative, holding that the testatrix had given her implicit acknowledgment to execute her will by (1) being present when the co-executor handed the will to the notary, (2) reading the attestation clause aloud, and (3) signing the will in the notary’s presence. The notary then carried out the testatrix’s “declaration” to execute her will according to the statutory formalities by obtaining the two witness signatures, and the testatrix sufficiently acknowledged her signature to the witnesses by remaining seated and watching, without interruption, as each of the witnesses signed.

In support of this holding, the Court explained that a testatrix’s acknowledgment of a previous signature to witnesses is equivalent to signing the instrument in their presence.

Murphy v. Prescott

In Murphy v. Prescott, 81 Mass. App. Ct. 1131 (Apr. 27, 2012), a decision issued pursuant to Rule 1:28, the Appeals Court addressed objections to the reasonableness of legal fees incurred in connection with the administration of an estate.

The decedent died intestate in 2005. His estate was valued at more than $3 million and was comprised of many (over 400) stocks and bonds, retirement accounts, savings accounts and checking accounts. The administrator hired an accountant and a lawyer to assist him in marshalling the assets and settling the estate. Marshalling the assets proved difficult because the decedent kept no records. In the end, the administrator paid himself a fee of $20,000, paid $10,500 to the accountant, and paid $86,000 to the lawyer, who had entered into a fee agreement with the administrator under which the lawyer was to charge an hourly rate of $350.

A number of heirs objected to the account on which these fees were disclosed. A trial ensued, the focus of which was the reasonableness of the $86,000 in legal fees. In particular, the objectors argued that the lawyer failed to maintain contemporaneous records of his time. The probate court overruled the objections and allowed the account, concluding that the legal fees were reasonable in light of the complexity of the estate. In so concluding, the probate court noted that the total of the legal fees was less than 3% of the value of the estate.

The Appeals Court affirmed, explaining that although it would not have been unreasonable to reduce the lawyer’s fees where he did not maintain contemporaneous time records, such a reduction is not required. The lawyer had testified at trial about the extensiveness of his work, and the probate court’s crediting that testimony was not an abuse of discretion.

The decedent executed a will, trust, and deed pursuant to which she left a share of her assets, including her home, to a church. The defendant, who is an attorney and elder at the church, was named as the executor and successor trustee, and the decedent also gave him a power of attorney some years later. After the decedent’s death, her heirs brought suit against the defendant, claiming among other things that he had unduly influenced the decedent. The heirs alleged that the decedent’s estate plan was inconsistent with her prior representations to them, that the church’s requests for money made her uncomfortable, and that she lacked sufficient intellectual acuity to understand the import of the documents.

The defendant moved to dismiss the undue influence and other claims, which included claims for breach of fiduciary duty, breach of a confidential relationship with the decedent, breach of a promise to the decedent to care for her and enable her to remain at home, tortious interference with expectancy, and legal malpractice. The superior court granted the motion to dismiss, characterizing the claims as speculative, and the Appeals Court affirmed.

Regarding the undue influence claim, the Appeals Court held that the heirs had failed to state a claim upon which relief could be granted because there was no allegation that the defendant had drafted the estate planning documents or had advised the decedent with respect to them (“the most that can be said from the complaint is that the defendant notarized the decedent’s signature on her will, trust, and deed”), that the defendant had a relationship with the decedent such that he was able to and did influence her estate planning, and that the defendant had profited personally. The Court noted as significant that the heirs had sued the defendant in his individual capacity, failing to name the church as a defendant or to allege that the defendant was responsible for the church’s actions and inactions.

Regarding the tortious interference with expectancy claim, which requires a showing that a defendant intentionally interfered with a plaintiff’s expectancy in some unlawful way, the Court held that “[i]n the absence of facts suggesting the defendant advised the decedent as to her estate plan or sought to influence her gifting in any way, much less an unlawful way, the claim correctly was dismissed.”

The Boston Bar Association Trusts & Estates Section Blog provides information as a service to its users and BBA members. Neither the Trusts & Estates Section nor the Boston Bar Association are a law firm and do not represent clients in any way. Although the information on this site is about legal issues and informational services it is not legal advice. Use of this blog does not in any way create a lawyer-client relationship. If you need a lawyer, the Boston Bar Association Lawyer Referral Service can refer you to a qualified attorney. http://www.bostonbarlawyer.org/ or call 617-742-0625.

The T&E Litigation Update is a recurring column summarizing recent trusts and estates case law. If you have question about this update or about T&E litigation generally, please feel free to e-mail the author by clicking on his name above.

McEachern v. Budnick

In McEachern v. Budnick, 81 Mass. App. Ct. 511 (April 2, 2012), the Appeals Court addressed the question of what constitutes valid “delivery” of a trust amendment to make it effective.

In the revocable trust instrument, the grantor, who was also the sole trustee, expressly excluded her son as a beneficiary. In two subsequent amendments, the grantor added language by which certain real property was to be distributed to her son upon her death. Upon executing these amendments, however, the grantor retained the originals in her possession, telling her lawyer that she wanted to hold them until she decided whether she actually wanted to provide anything for her son.

After the grantor’s death, her daughter, the successor trustee, brought an action to evict the son from the real property. He argued in opposition that he is the rightful owner pursuant to the trust amendments. The Superior Court agreed, granting summary judgment in his favor and holding that the trust amendments were effective when executed because the grantor was also the sole trustee, and so delivery was automatic.

The Appeals Court reversed and remanded for further proceedings to determine the grantor’s intent. In so doing, the Court explained that delivery means more than physical transfer of possession. “Under Massachusetts law, delivery of a written instrument amending a trust … is principally a question of intent.”

Bank of America v. Center for Human Development

In Bank of America v. Center for Human Development, 81 Mass. App. Ct. 1127 (April 9, 2012), a decision issued pursuant to Rule 1:28, the trustee of a testamentary trust sought instructions as to whether the share of trust income paid to the Child and Family Service of Pioneer Valley (“CFS”) should continue to be paid to its successor by merger, or alternatively to the remaining charitable beneficiaries designated in the trust. The probate court ruled that as a result of the merger, CFS ceased to exist within the meaning of the trust and ordered its share of the trust income to be divided amongst the remaining designated charities. The Appeals Court vacated and remanded the probate court’s judgment, explaining that there was insufficient evidence to establish whether CFS ceased to exist as a result of the merger. The Court noted that the objecting party, the Young Women’s Christian Association of Western Massachusetts, had not filed a brief in support of its position, and that the Attorney General had not made its position known.

Lombardi v. Director of the Office of Medicaid

In Lombardi v. Director of the Office of Medicaid, Case No. 11-P-1208, 2012 Mass. App. Unpub. LEXIS 479 (April 17, 2012), another decision issued pursuant to Rule 1:28, the Appeals Court affirmed a determination of an applicant’s ineligibility for long-term care benefits. The question presented was whether MassHealth could consider a court-approved transfer of assets, pursuant to a court-approved estate plan, in determining eligibility for benefits. The Court rejected the applicant’s argument that a probate court can insulate asset transfers from being considered.

The Boston Bar Association Trusts & Estates Section Blog provides information as a service to its users and BBA members. Neither the Trusts & Estates Section nor the Boston Bar Association are a law firm and do not represent clients in any way. Although the information on this site is about legal issues and informational services it is not legal advice. Use of this blog does not in any way create a lawyer-client relationship. If you need a lawyer, the Boston Bar Association Lawyer Referral Service can refer you to a qualified attorney. http://www.bostonbarlawyer.org/ or call 617-742-0625.

The Massachusetts Uniform Probate Code (the “MUPC”) became fully effective on March 31, 2012. Article VII of the MUPC governs certain aspects of trust administration. A bill to enact the Massachusetts Uniform Trust Code (the “MUTC”), which will repeal Article VII of the MUPC, is pending before the legislature. The MUTC contains provisions that give trustees more flexibility in administering trusts, reduce the necessity for court intervention and clarify the rights of the trust beneficiaries. Until it is enacted, however, Article VII of the MUPC is in effect. While some of provisions of the MUPC will only apply to trusts that become irrevocable after March 31, 2012, certain administrative provisions likely also apply to trusts irrevocable prior to that date.

Below are some highlights of the MUPC and issues to consider:

A Trustee’s Duty to Provide Information to the Beneficiaries

A trustee is required to notify the beneficiaries within 30 days when a trust becomes irrevocable or a trustee is appointed thereafter.

A trustee is required to provide information about the trust at the request of the beneficiaries.

Upon request, a beneficiary is entitled to receive annual accounts and a final account of the administration of the trust.

Principal Place of Administration of the Trust

A trustee is under a continuing duty to administer a trust in a place appropriate to the trust’s purposes and its efficient management.

The provisions of a trust relating to the place of administration control unless compliance is contrary to the purposes and efficient management of the trust.

If a principal place of administration becomes inappropriate, a court can remove a trustee and appoint a trustee in another state or country.

The views of adult beneficiaries are to be taken into account in determining the suitability of a trust’s place of administration.

Court Removal of a Trustee

The trust beneficiaries may petition a court to remove a trustee; unlike prior law, MUPC provisions do not require that the beneficiaries show cause for removal.

A trustee may also petition a court to remove a co-trustee.

The MUPC provides that the court will grant such a petition if it determines that removal is in the best interests of the beneficiaries.

Compromise Agreements

A trustee and beneficiaries may enter into compromise agreements resolving questions regarding the construction or interpretation of a trust instrument, disputes between beneficiaries and/or a trustee, the powers and authority of a trustee, the approval of a trustee’s accounts and other issues.

The court will approve an agreement if it finds that the controversy is in good faith and the effect of the agreement on persons represented by others, such as a parent or guardian, is just and reasonable.

Virtual Representation

Absent a conflict of interest:

In some matters personal representatives and trustees can represent persons interested in an estate or trust.

Conservators and guardians can represent a ward/protected person.

Parents can represent their minor and unborn children, but not grandchildren and their issue.

A beneficiary with a substantially identical interest in the trust can represent unborn and unascertained beneficiaries.

There are some open questions as to how these provisions will be applied. Personal representatives and trustees will need to identify conflicts of interest and situations in which virtual representation is not appropriate.

Time Limits on Commencing Legal Proceedings Against a Trustee

Actions against a trustee in connection with a final account must be commenced within the first to occur of the following:

Six months after a beneficiary’s actual receipt of a final account that fully discloses material matters.

Three years after a beneficiary actually received a final account and was informed of the location of the trust records for review, even if the account does not fully disclose a material matter.